Module: | MODULE A: INTERNATIONAL BANKING
Q10: Read the following statements concerning the risk management limits imposed on foreign exchange dealers by a bank internal policies and regulatory guidelines. Identify the incorrect statements.
Statement 1. A Daylight Open Position Limit restricts the maximum unhedged foreign currency exposure a dealer is permitted to hold at any given point during active trading hours.
Statement 2. An Overnight Open Position Limit is generally much larger than a Daylight limit because holding unhedged positions across different time zones overnight carries significantly less risk.
Statement 3. If a dealer buys 50,00,000 US Dollars and simultaneously sells 50,00,000 US Dollars for the exact same value date, their net open position for that specific currency becomes zero.
Statement 2. An Overnight Open Position Limit is generally much larger than a Daylight limit because holding unhedged positions across different time zones overnight carries significantly less risk.
Statement 3. If a dealer buys 50,00,000 US Dollars and simultaneously sells 50,00,000 US Dollars for the exact same value date, their net open position for that specific currency becomes zero.
✅ Correct Answer: B
🎯 Quick Answer:
Statement II is factually flawed, making Option B the correct answer to the question.Structural Breakdown: Statement I is correct.
The Daylight limit or Intraday limit allows dealers to take larger temporary positions during the day when markets are highly liquid and they can quickly react to news.
Statement II is incorrect.
The Overnight limit is always significantly smaller, not larger, than the Daylight limit.
When domestic markets close, international markets like New York or Tokyo continue trading.
An adverse geopolitical event during the night could cause a massive gap in currency prices by the time the domestic market opens the next morning.
Banks strictly minimize overnight open positions to mitigate this gap risk.
Statement III is correct.
An open position only exists when there is a mismatch between assets, meaning purchases, and liabilities, meaning sales, in a specific currency.
Perfectly matching buys and sells creates a square position, neutralizing market risk.